Directors' Report on the State of the Company's Affairs for the period ended March 31, 2011

Transcription

1 Translation from the Hebrew. The Hebrew version is the binding version. Directors' Report on the State of the Company's Affairs for the period ended March 31, 2011 Below is the Directors' Report of Israel Chemicals Ltd. ("ICL" or "the Company") for the period ended March 31, Description of the Company and its Business Environment 1.1 Description of ICL ICL is a multinational company that operates mainly in the areas of fertilizers and specialty chemicals, in three segments: Fertilizers, Industrial Products and Performance Products. ICL s operations are based primarily on natural resources potash, bromine, magnesium and sodium chloride from the Dead Sea, and phosphate rock from the Negev Desert, based on concessions and licenses from the State of Israel. Operations are also based on potash and salt mines in England and Spain under lease agreements and licenses from the relevant authorities in those countries. ICL is active in the production of these minerals, in their sale throughout the world, and also in the development, production and marketing of downstream products based primarily on these raw materials or complementary to these products. ICL has a prominent position in the world in the markets for potash, bromine, pure phosphoric acid, specialty phosphates, bromine and phosphorus-based flame retardants and chemicals used in wildfire retardants. Potash and phosphate are core components of fertilizers. Bromine is used in a wide range of applications, primarily as a basic ingredient of flame retardants. ICL s products are used primarily in agriculture, electronics, food products, oil and gas drilling, water purification and desalination, and in industries such as detergents, paper, cosmetics, pharmaceuticals, automotive, aluminum and others. ICL has decades of accumulated experience in most of its businesses. ICL has direct access to most of the raw materials required for its activities, at low cost and high quality, by virtue of the exclusive concession granted to ICL by the State of Israel for extraction of minerals from the Israeli side of the Dead Sea, in return for payment of royalties to the State. The production costs of the potash and bromine that ICL extracts from the Dead Sea are relatively lower than the costs of other producers in the world that do not have access to the Dead Sea. ICL s main production facilities are based in Israel, Germany, the USA, Holland, Spain, the UK, China, Brazil and France. ICL has other production facilities in Austria, Belgium, Turkey, Argentina, Canada, Ireland and Australia. ICL s operations outside of Israel are primarily in the manufacture of products that are complementary to or are based on its operations in Israel or in related fields. Approximately 96% of all ICL s production is sold outside of Israel. The operations of ICL s facilities are largely integrated with one another, both in terms of supply of raw materials and in the way that one facility frequently utilizes the by-products of another for the manufacture of end products (for example, bromine is produced by utilizing the bromine in the byproduct streams from the evaporation ponds used to produce potash. Bromine production, utilizes chlorine, a by-product stream in the production of magnesium and others). Approximately 4% of ICL s production is sold in Israel. For specific products, ICL and some ICL companies have been declared a monopoly in Israel.

2 Approximately 50% of ICL s annual sales turnover comes from production outside of Israel. ICL has no material dependency on any single customer, supplier or source of raw materials that are not included in the concessions granted to ICL. ICL applies an overall policy of sustainable development that integrates social, economic and environmental considerations in all of its business activities. The main points of the policy include social responsibility, which covers contributing to the community, taking responsibility for the safety, hygiene and the well-being of employees, reducing environmental effects, creating a dialog and transparent communication with the authorities, as well as other subjects. As noted, ICL operates in three segments of operation on a management-functional basis, even where administrative division and legal ownership do not fully correspond, as described below. A. ICL Fertilizers ICL Fertilizers produces potash from the Dead Sea, and mines and produces potash and salt from underground mines in Spain and England. ICL Fertilizers refines the potash into various grades and sells it worldwide. ICL Fertilizers also uses some of the potash for the manufacture of compound fertilizers. ICL Fertilizers also mines and processes phosphate rock from open-pit mines in the Negev region, and at its production facilities in Israel it manufactures sulfuric acid, fertilizer-grade phosphoric acid, phosphate fertilizers, complex fertilizers based mainly on potash and phosphate, and specialty fertilizers. ICL Fertilizers also manufactures fertilizers in Holland, Germany and Belgium. In addition ICL Fertilizers manufactures phosphate-based animal feed additives in Turkey and Israel. ICL Fertilizers markets its products worldwide, and its top sales destinations are Europe, Brazil, India, China and Israel. On 28 February 2011, a transaction was completed for acquisition of the companies, assets, and activities of a specialty fertilizer business unit. The business unit manufactures and sells specialty fertilizers, growing media, plant protection products, grass seeds for commercial nurseries, public parks, sports fields and intensive agriculture. ICL intends to integrate the operations of the acquired unit in ICL Fertilizers, taking advantage of the marketing, operating and other synergies with ICL's specialty fertilizer activities. Integration of the business unit will expand the range of products offered by ICL Fertilizers in the specialty fertilizer sector. B. ICL Industrial Products ICL Industrial Products manufactures elementary bromine from an end-brine that is created as a by-product of the potash production process in Sdom, as well as bromine-based compounds. ICL Industrial Products is the world's leading manufacturer of elementary bromine, producing about 35% of total global production in the reporting period. ICL Industrial Products uses about 76% of the elementary bromine it produces for manufacturing bromine compounds at its production sites in Israel, Holland and China. In addition, ICL Industrial Products produces and markets flame retardants and other phosphorus-based products in plants in the USA and Germany, produces various salt, magnesia and chlorine products at its production sites in Israel, and also manufactures chlorine-based products in Israel and the USA, and markets its products worldwide. C. ICL Performance Products ICL Performance Products purifies some of the fertilizer-grade phosphoric acid manufactured by ICL Fertilizers, purchases purified phosphoric acid from other sources and also manufactures thermal phosphoric acid. The purified phosphoric acid is used in the manufacture of downstream products of high added value phosphate salts (which in turn are a raw material in the production of food additives), hygiene products, phosphorus derivatives and wildfire retardants and extinguishers. ICL Performance Products also produces specialty products based on aluminum oxide ( alumina ) and other raw materials. The main production sites of ICL Performance Products are in Europe (mainly Germany), the USA, Brazil, Israel and China. During the period approximately two thirds of the sales of ICL Performance Products were of pure phosphoric acid of various qualities, and of downstream products of the acid. In addition to these segments, other ICL activities include desalination and the production of magnesium metal. 2

3 1.2 Business environment and profitability ICL is a multinational company. The Company's financial results are affected by global economic trends, changes in terms of trade and financing, and fluctuations in exchange rates. The demand for ICL products is affected by the demand for basic agricultural products and the global economic situation, among other factors. Together with and as part of its business strategy, ICL is taking steps towards adapting its marketing and production policies to global market conditions. ICL is focusing on improving cash flow and diversifying financing sources, and is committed to taking action to improve efficiency and savings. Most of ICL s sales are in foreign currency, mainly US dollars and euro. A significant part of its operating expenses in Israel is denominated in shekels; therefore depreciation of the shekel against the dollar has a positive impact on ICL's profitability, while appreciation has the opposite effect. The depreciation of the average exchange rate of the euro against the dollar has a negative impact on ICL s profitability, while appreciation has the opposite impact. Conversely, depreciation of the euro against the dollar improves the competitive ability of ICL's subsidiaries whose functional currency is the euro, compared with competitors whose functional currency is the dollar. The weakening of the dollar against the shekel in the period compared with the corresponding period last year, impacted negatively on ICL s operating income and financing expenses, by an estimated $5.4 million and $2.5 million, respectively. The forecast for ICL s surplus of revenues over expenses in euro for the next 12 months amounts to approximately $350 million. 1 ICL hedges against some of these foreign currency exposures. Most of ICL s loans bear variable interest rates, exposing the Company to fluctuations in these rates. The Company partially hedges against this exposure by using financial hedging instruments, including derivatives. For details of hedging amounts for reducing such exposures, see section 8 below. There is interdependence between the amount of available arable land and the amount of food for the population, and the use of fertilizers. The increase in global consumption of grains (such as cereals, rice, soybean and corn) is affected by natural population growth and the change in food consumption habits (a shift to richer nutrition, largely based on animal protein, which increases grain consumption) resulting from the rising standard of living, mainly in developing countries. Global consumption of grains (cereals, rice, soy, corn, etc.) is also affected by environmental-quality considerations and the efforts of western countries to reduce dependence on oil imports, which strengthens the trend to shift to bio-fuels. These trends have already led to significantly lower grain stocks a few years ago, and consequently, higher prices of agricultural produce, increased planting of grain crops worldwide, and higher yield per unit of agricultural land, mainly by increased application of fertilizers. After a decrease in grain prices in 2009, following the economic crisis, grain prices rose again in The price increases are mainly due to global consumption of grains and concerns about lower than expected yields, due to a decline in corn production in the United States, floods in Australia, drought and fires in Russia, drought in some regions in China and floods in other regions of China and low corn production in Brazil due to late planting. According to the report of the US Department of Agriculture (the USDA) in April 2011, the ratio between grain stores to annual grain consumption is expected to drop slightly to 19.5% at the end of the 2010/2011 agricultural year compared with the previous estimate. Most of the decrease is due to a decrease in corn stores following a sharp rise in global food and animal feed consumption and 1 The assessments of the surplus of revenues over expenses in euro in this paragraph are forward-looking information and there is no certainty that they will be realized. They could change due to fluctuations in world markets as well as local markets, especially at ICL's production sites and in the target markets for ICL products, including, inter alia, changes in the levels of supply and demand and in the prices of the products and changes in the magnitude of the operating expenses of the companies whose functional currency is the euro. 3

4 ethanol production in the United States 2. Recent estimates were 19%-19.6% compared with 21-22% in the first half of In the short term, demand for fertilizers is volatile and is affected by factors such as weather in the world s central agricultural growing regions, fluctuations in planting of the main crops, agricultural input costs, agricultural product prices and developments in biotechnology. Some of these factors are influenced by subsidies and credit lines granted to farmers or to producers of agricultural inputs in various countries, and by environmental regulations. Changes in exchange rates, legislation and international trade policy also affect the supply, demand and level of consumption of fertilizers worldwide. Notwithstanding the volatility that can be caused in the short term as a result of these factors, the Company estimates that the policy of most countries in the world is to ensure orderly and high-quality supply of food to the population, thereby encouraging agricultural production, which 3 should preserve the long-term growth trend. Since the middle of 2006, fertilizer and potash prices have soared, reaching an all-time high in the middle of Most potash sales in the period were at a price of $800 and $850 (CFR), mainly in Southeast Asia and Brazil. A few sales were made at approximately $ 1,000 per ton (CFR). Following the decline in global demand for fertilizers and potash, as a result of the economic crisis, prices began to fall. The immediate sharp decline was in nitrogen and phosphorus prices. Potash prices also dropped, although the decrease was not as sharp as the decrease in prices of nitrogen and phosphorus fertilizers. Towards the end of 2009, the global economy started to recover, together with demands in the fertilizer market. In January 2011, the trading company BPC announced that it had signed a six-month contract in China for the supply of 600,000 tons (including an optional 120,000 tons) at a CFR price of $400 per ton. A week later, the Canadian company Canpotex signed a six-month contract for 600,000 tons at the same price. In February 2011, ICL Fertilizers signed contracts with several customers in China to supply 500,000 tons of potash, in the first half of 2011, at a similar price. Demand in India also continued to rise steadily. In March 2010, several potash manufacturers, including ICL Fertilizers, signed a contract to supply potash to customers in India over one year at a price of USD 370 per ton CFR. According to the contract, ICL Fertilizer would supply about 1.4 million tons of potash. In 2010, India imported a record 5.6 million tons of potash. Negotiations are now underway with potash importers in India for the supply of potash in the agricultural year. There was also a high demand for potash in the USA, Brazil and Southeast Asia. In 2010, Brazil and the USA imported 6.14 million and 10.1 million tons of potash, respectively. In the first quarter of 2011, Brazil imported 1.57 million tons of potash. The high demand for potash launched a process still on-going of price rises in the major markets. In September 2010, Canpotex and BPC announced price rises of $50 per ton in Brazil and Southeast Asia to a price level of $ per ton. At the same time, PCS announced a price increase in the US of a similar dimension. At the beginning of November 2010, BPC announced an additional $25 per ton increase in Brazil and Southeast Asia. During the same month, PCS announced a price increase of more than $80 per ton in its US prices. At the beginning of 2011, the price of granular 2 The estimates of future trends in this paragraph are forward-looking information and there is no certainty as to whether, if and at what pace they may be realized. They could change due to fluctuations in global agricultural markets, particularly in the target markets for ICL products, including changes in the level of supply and demand, extreme changes in the weather, prices of products, commodities and grains, input prices, transportation and energy costs, and they could also be affected by actions taken by governments, manufactures and consumers. The financial markets could also have a possible effect, including changes in exchange rates, the credit situation and interest costs. 3 The assessments of future trends in this paragraph are forward-looking information and there is no certainty that they will be realized, when and at what pace. They could change due to fluctuations in world markets as well as local markets, especially at ICL's production sites and in the target markets for ICL products, including, inter alia, changes in the levels of supply and demand and in the prices of the products, the commodities and the cereals. There could also be impact from actions taken by governments, producers and consumers. In addition there could be possible impact of the situation in the financial markets, including changes in exchange rates, credit conditions and interest rates. 4

5 potash in Europe increased by 18 per ton and at the same time the prices of potash for industry were updated. During January 2011, Canpotex announced a price increase of $30 per ton in the markets of Southeast Asia. In Europe, prices of potash have been increased since the beginning of the second quarter of 2011 by an additional per ton. In Brazil and Asia, BPC and Canpotex announced an additional price increase of $50 per ton, so that the price in the spot markets reached a level of $510 to $525 per ton. At the beginning of 2010, the Indian government released its new policy on fertilizer subsidies, which came into force on April, 1, The main part of the plan is a gradual transition from subsidizing products on a list of fertilizer types, to subsidy according to nutrients. As far as the subsidy for imported potash and phosphoric fertilizers is concerned, in the policy based on the maximum final retail price will be cancelled, but limitations were set on changes in the final price to consumers. The upward trend in demand for phosphate fertilizers that started in the second half of 2009 continued in On the supply side, environmental regulations restricted production of competitors in the USA and export taxes imposed by the Chinese government diminished the export capacity of Chinese manufacturers. Following the riots and change of regime in Tunisia, phosphate rock mines and plants were shut down, contributing to lower global fertilizer supply. According to recent reports, activities have resumed at the plants, however supply of phosphate rock is still restricted, which restricts the rate of fertilizer production. At the end of March 2011, the Moroccan phosphate manufacturer OCP signed a contract in India to supply 500,000 tons of DAP at USD 612 per ton, for six-months, from April to December 2011, representing a price increase of USD 112 compared to the prior year. At the same time, the American PhosChem also signed a contract for six months to supply one million tons at a similar price. Subsequently, other companies signed contracts at a similar price for only six months, contrary to prior years, when contracts were signed for a full year. Up to the preparation date of this report, contracts were signed for the supply of 3.2 million tons (for six months) and other agreements are in various stages of negotiations. In 2010/11, DAP imports to India reached 7.4 million tons. The operations of ICL Industrial Products are largely affected by activities in the electronics, construction, automotive, oil drilling, furniture, textile and water treatment markets. The increased demand for most segment products continues to be positive, together with continued price increases in most products. Higher demand and lower supply of bromine in China resulted in an increase in sale prices of elementary bromine compared to the corresponding period last year and compared to the last quarter of The continuing increase in demand for flame retardants is mainly due to the growing demand for electronics in the Far East and reduced production by some Chinese manufacturers. In April 2010, a drilling rig exploded in the Gulf of Mexico, which is a major sales territory for the Company's products. As a result, the US government announced the suspension of deep sea drilling in this region. Although the suspension of drilling has been canceled, the US government is restricting drilling permits, resulting in low segment sales in this region. Nevertheless, sales and prices of clear solutions for drilling increased compared to the corresponding period last year, due to increased sales in other territories, due to higher demand and lower supply of Chinese manufacturers of clear solutions, following a price increase of elementary bromine in China. Demand for chlorine-based biocides increased compared to the corresponding period last year, mainly due to the postponement of pre-season sales from the fourth quarter of 2010 to the reporting period. The operations of ICL Performance Products are affected by competition in the target markets, by price volatility in the fertilizer market, which affects the segment's principal raw materials, and by volatility in energy prices. The current quarter was marked by higher demand in Europe compared to the corresponding quarter last year and compared to the fourth quarter in 2010, and a decrease in North America, mainly due to harsh weather conditions in February. The price rise in the fertilizer market in the first quarter resulted in higher prices of the main raw materials used in the production of phosphorus-based 5

6 products. In addition, the increase in energy prices resulted in higher production and transportation costs. Concurrently, selling prices of ICL Performance Products increased. Political instability in North Africa and the Middle East led to a decrease in demand in some countries in these regions. Shipping expenses amounted to about 6% of the total operating costs of ICL in the reporting period. Since 2010, bulk shipping prices have been highly volatile alongside a trend to a decrease in the BDI. Average BDI in the first quarter of 2011 was 1,365 points, a decrease of 55% compared to the corresponding quarter last year. Energy costs account for approximately 8% of ICL's total operating costs in the reporting period. Commencing in the third quarter of 2009, energy prices started to rise. In this quarter there was another sharp increase in prices of oil compared to the corresponding quarter last year. The gradual increase in the use of natural gas offsets the effect of the increase in prices of oil and oil products on Group results. 1.3 This Directors' Report is attached to the interim financial statements for the period ended March 31, 2011, and assumes that the financial statements are available to the reader. The Directors' Report is in condensed form for the period and assumes that the Periodic Report for 2010 is also available to the reader. The financial data, including comparative figures, are taken from the financial statements of ICL, which were prepared in accordance with International Financial Reporting Standards (IFRS). 2. Results of Operations 2.1 Principal financial results Hereunder the condensed results of operations in the reviewed period, compared with the results for the corresponding period last year, in millions of dollars. $ million 1-3/ / % of sales $ million % of sales $ millions % of sales Sales 1, , ,691.5 Gross profit , Operating income , Pre-tax profit , Net profit to Company shareholders , EBITDA* , Cash flow from current operations ,537.0 Investments in property, plant and equipment, less grants * Calculated as follows, in millions of dollars: 1-3/ / Net profit to Company shareholders ,024.7 Depreciation and amortization Net finance expenses (income) 23.0 ( 0.1) 53.2 Income tax Non-recurring expenses Total ,

7 2.2 Results of operations for January March 2011 Sales Sales of ICL in the reporting period amounted to approximately $1,528.3 million, compared with $1,382.5 million in the corresponding period last year, an increase of about 10.5%. This increase is due to an increase in selling prices, which led to an increase of about $156 million in sales. and to consolidation for the first time of companies acquired during the quarter, which increased total sales by USD 36 million. Conversely, quantities of potash sold decreased in the reporting period, mainly due to the effect of the strike in Sdom (see further details in section 9.3), which was offset by an increase in quantities sold of the other products of the Company. The net effect of the decrease in quantities sold reduced sales by $46 million. Below is a geographical breakdown of sales: 1-3/ /2010 CIF sales $ million % $ million % Israel North America South America Europe Asia Rest of the world Total 1, , The breakdown of sales indicates an increase in sales in Europe and North America, mainly due to the growing demand for fertilizers, bromine and bromine products in these areas. The strike in Sodom resulted in the suspension of potash shipments and adversely affected sales, mainly in Asia and South America. Gross profit Gross profit amounted to $638.1 million, compared with a profit of $559.1 million in the corresponding period last year, an increase of approximately $79 million. The gross profit margin out of sales amounted to 41.8%, compared with about 40.4% in the corresponding period last year. The increase in the gross profit margin compared to the corresponding period last year is mainly due to an increase in selling prices, which resulted in an increase of USD 150 million, and to consolidation for the first time of companies acquired in the quarter, which increased gross profit by USD 12 million. This increase was partially offset by the decrease in quantities sold, which resulted in a decrease of about USD 36 million and by an increase in raw material prices, which resulted in a decrease of about USD 51 million. Sales and marketing expenses Expenses for this item amounted to $193 million, compared with $185.8 in the corresponding period last year. General and administrative expenses These expenses amounted to $61.3 million, compared with $60.3 in the corresponding period last year. Research and development expenses R&D expenses (net of grants from the Chief Scientist) amounted to $16.6 million, an increase of about $1.9 million compared with the corresponding period last year. 7

8 Operating income Operating income amounted to $360.5 million, an increase of $57 million compared with the corresponding period last year. The increase in operating income is mainly due to the increase in gross profit noted above. Operating income as a percentage of sales turnover is 23.6%, compared with 22% last year. The increase in the operating income margin stems mainly from the increase in selling prices. Finance income/expenses Net finance expenses amounted to about $23 million, compared with income of approximately $0.1 million in the corresponding period last year. Finance expenses this year compared with finance income last year, is mainly due to the following factors: A. Expenses in the period as result of revaluation of transactions in financial derivatives and from revaluation of net short-term financial liabilities amounting to $ 6.5 million, compared with revenues of 19.4 million last year. B. A decrease of about $1.4 million in finance expenses due to the effect of exchange rate differences on the provisions for employee benefits. Tax expenses Expenses amounted to $ 61.2 million, compared to $60.6 million last year. The pre-tax profit rate is 17.9% compared to 20% last year. The decrease in the tax rate in the reporting period compared to the corresponding period last year is due to the following factors: A. The effect of the change in the dollar-shekel exchange rate compared to the corresponding quarter last year, which led to an increase in the tax rate of companies operating in Israel, due to differences in the measuring base. B. The tax rate on ordinary income in Israel decreased from 25% to 24%. C. In the current quarter, there was a decrease in non-taxable expenses compared to the corresponding quarter last year, due to a decrease in the cost of employee options. Net profit Net profit for the shareholders of the Company amounted to $279.7 million, compared with $240.5 million in the corresponding period last year, an increase of $39.2 million, representing an increase of 16.3% in net profit. 8

9 3. Segments of Operation The segments of operation of ICL are presented below according to the management of segments described in the introduction to this report. CIF sales 1-3/ / by segment of operations $ millions % of sales $ millions % of sales $ millions % of sales ICL Fertilizers , ICL Industrial Products , ICL Performance Products , Others and offsets ( 31.4) 5.0 (69.0) Total 1, , ,691.5 Note: The sales data for the segments and their percentages of total sales are before setoffs of inter-segment sales. Operating income by 1-3/ / segment of operations $ millions % of sales $ millions % of sales $ millions % of sales ICL Fertilizers ICL Industrial Products ICL Performance Products Others and offsets ( 1.8) ( 6.8) (10.7) Operating income (consolidated) ,346.1 Note: The profit percentage is from sales before setoffs of inter-segment sales. 3.1 ICL Fertilizers Below is a breakdown of the sales and operating income of the segment in the reporting period, by areas of operation (before setoffs of inter-segment sales): 1-3/ / Sales Potash 55% 69% 67% Phosphate 45% 31% 33% Operating income Potash 76% 95% 89% Phosphate 24% 5% 11% Sales Sales in the reporting period amounted to $836.7 million, an increase of approximately $70.7 million compared with the corresponding period last year, representing an increase of about 9.2%. The increase in sales stems mainly from an increase in selling prices of potash, phosphate fertilizers and phosphate rock, which led to an increase of approximately $88 million in sales, and from consolidation for the first time of companies acquired in the quarter, which contributed to an increase of $36 million in sales. The decrease in sales of potash net of the offset by the increase in sales of phosphate fertilizers and phosphate rock, led to a decrease of approximately $58 million in sales. 9

10 Profitability Operating income in the segment amounted to $243.5 million, an increase of $11.2 million compared with the corresponding period last year. The margin of operating income out of sales was 29.1%, compared with 30.3% last year. The increase in operating income is mainly due to an increase in selling prices of potash and phosphate fertilizers, which increased operating income by approximately $72 million. The fall in sales quantities of potash, offset by a rise in sales quantities of phosphate fertilizers and phosphate rock, reduced operating income by approximately $58 million. Potash Revenue from potash includes the sales of potash from Israel, Spain (Iberpotash) and England (Cleveland Potash). Potash Revenue and profit $ millions 1-3/ / Revenue * ,140.7 Operating income * Including revenue from inter-segment sales The decrease in revenue in the reporting period compared with the corresponding period last year is due to a decrease in the quantities of potash sold, which reduced sales by approximately $90 million. This decrease was partially offset by an increase in potash prices, which increased sales by about $31 million. The decrease in operating income is mainly due to the effects of the decrease in quantities sold, which decreased operating income by about $64 million. The decrease was partially offset by an increase in selling prices amounting to about $19 million. In the reporting period, the Dead Sea Works workers union announced a strike, including disruption of potash production and maintenance activities. The strike caused immediate production losses of approximately 450 thousand tons, however the production process and the building up stocks of carnallite in the evaporation ponds continued normally. The Company believes that it will succeed in recovering this inventory in its production over the coming years. During the strike period, potash shipments from Israel were suspended to customers. The quantity of potash sold from Israel decreased by about 220 thousand tons compared with the same period last year. The Company believes that part of the sales that were not performed will be made up by the end of the year. Potash Production, sales and closing inventories Thousands of tons 1-3/ / Production ,251 Sales to external customers 987 1,273 5,266 Sales to internal customers Total sales (including internal sales) 1,046 1,329 5,558 Closing inventory 1,312 2,584 1,610 10

11 The quantity of potash sold to external customers in the reporting period is about 286 thousand tons less than in the corresponding period last year. The quantity of potash produced in the reporting period is about 25% less than the quantity produced in the corresponding period last year. In January 2011, the trading company BPC announced that it had signed a six-month contract in China for the supply of 600,000 tons (including an optional 120,000 tons) at a CFR price of $400 per ton. A week later, the Canadian company Canpotex signed a six-month contract for 600,000 tons at the same price. In February 2011, ICL Fertilizers signed contracts with several customers in China to supply 500,000 tons of potash, in the first half of 2011, at the same price as in the transaction with the other producers in the market On April 21, 2011 the British government approved a 15 million grant to Cleveland Potash Ltd. (CPL), a UK-based company of ICL Fertilizers, to encourage CPL's mining and processing of polyhalite, a mineral used as fertilizer for agriculture and which is found beneath the potash layer in CPL's mine. Geological studies performed by CPL indicate that there more than one billion tons of polyhalite ore beneath the potash layer in the Company's mine. Polyhalite is a mineral that can be used in its natural form as fertilizer for organic agriculture or as raw material in the production of specialty fertilizers. ICL is considering constructing a plant to produce specialty fertilizers and industrial products based on polyhalite in the Tees Valley area, near its potash mine in the UK. The British government announced that it views with importance the establishment of a production plant and increased mining activities in that it will result in increased employment in the area, therefore it intends to assist and support the establishment of the production facility through the above-mentioned grant. On April 13, 2011, ICL's board of directors, as part of its streamlining plan for Iberpotash SA, the Spanish subsidiary of ICL Fertilizers, approved the merger of two plants into one site. The Suria production site, including the mine and plant, will be expanded and mining and production at the other site will be terminated. The first stage of the plan, which has been approved, includes expansion of potash production and granulation capacity as well as establishment of a production plant for vacuum salt (salt with high chemical purity) at Suria. The second stage, which has not yet been approved, includes further expansion of potash production capacity, to 1.1 million tons, of which 630,000 tons will be granulated potash and 50,000 tons will be technical potash, as well as a production capacity of 1.5 million tons of vacuum salt. The Company believes that implementation of the first stage of the plan, which will require investment of an estimated 160 million, will be completed at the beginning of The Company believes that implementation of the first stage of the plan will reduce expenses and contribute to streamlining, which will reduce potash production costs and contribute to conformity with sustainability principles related to environmental protection. Implementation of the second stage will result in higher potash production at one site compared to production at two separate sites. The Company believes that closing the second site will not have a material effect on the Company's results in the second quarter of Fertilizers and phosphates Revenue from these products derive from sales in Israel and abroad of phosphate rock (as a raw material and for direct fertilization), fertilizers (including phosphate, compound, liquid and fully soluble fertilizers, which include various proportions of nitrogen, phosphorus and potassium), phosphoric acid used as a raw material for fertilizer production (green acid), and other products. Fertilizers and phosphates Revenue and profit $ millions 1-3/ / Revenue * ,056.3 Operating income * Including revenue from inter-segment sales The increase in revenues in the reporting period, compared to the corresponding period last year, is mainly due to the increase in phosphate fertilizer sales offset by the decrease in sales of phosphate rock, which increased sales by $36 million dollars and to consolidation for the first time of companies acquired in the quarter, which increased the sales by about $36 million dollars. In addition, the 11

12 increase in selling prices of phosphate fertilizers and phosphate rock, also contributed to an increase of about $57 million in sales. The increase in operating profit this quarter, compared with last year, is mainly due to the increase in sales quantities and selling prices of $59 million..fertilizers and phosphates Production and sales Thousands of tons 1-3/ / /2010 Phosphate rock Rock production ,135 Sales * Phosphate rock used for internal purposes ,584 Fertilizers Production ,688 Sales* ,735 * To external customers Phosphate rock is produced according to demand, both for internal uses and for sales to external customers, while maintaining appropriate stock levels. In the first quarter there was an increase in the production of phosphate rock compared with last year. The quantity of phosphate fertilizers produced was similar to that produced last year. The increase in sales of phosphate fertilizers in the reporting period, compared with the corresponding period last year, is due to the rise in demand in India, Brazil, the United States and in Southeast Asia. On the global supply side, environmental regulations restricted production of competitors in the USA and export taxes imposed by the Chinese government on phosphate fertilizers diminished the export capacity of Chinese manufacturers. Following the riots and change of regime in Tunisia, phosphate rock mines and plants were shut down, contributing to lower global fertilizer supply. According to recent reports, activities have resumed at the plants, however supply of phosphate rock is still restricted, which restricts the rate of fertilizer production. On February 28, 2011, a transaction was completed with the American company Scotts Miracle-Gro to acquire the companies, assets and activities of its specialty fertilizer business unit (see section 9.4). Subsequent to the reporting date, the subsidiary in Spain acquired 100% of the interests in A. Fuentes Mendez SA, which manufactures and markets specialty fertilizers in Spain (see Section 9.8). 3.2 ICL Industrial Products Sales Sales of ICL Industrial Products in the reporting period reached a record $373 million, an increase of $81 million compared with the corresponding period last year. The increase is due to an increase in selling prices, which contributed to an increase of $52 million in sales, mainly due to an increase in selling prices of flame retardants amounting to $36 million. Quantities sold increased by $29 million. Profitability Operating income in the reporting period reached a record $71.3 million, compared with $33.7 million in the corresponding period last year. The percentage of operating income from sales amounted to 19.1% compared with operating income of 11.5% last year. 12

13 The increase in operating income was mainly due to the increase in selling prices, which contributed to an increase of about $52 million in operating income and due to the increase in quantities sold and produced, which contributed to an increase of $9 million in operating income. Conversely, the increase was partially offset by an increase in raw material and energy prices and an increase in other expenses, which contributed to a decrease of $12 million and $8 million, respectively. 3.3 ICL Performance Products Sales: Sales in this segment amounted to $350.1 million, an increase of $31 million compared with the corresponding period last year. The increase was due to an increase in selling prices of some of the segment products, which resulted in an increase of $18 million in sales as well as an increase of $12 million as a result of the increase in quantities sold. Profitability Operating income of the segment in the reporting period amounted to $47.4 million, an increase of about $3.2 million compared with the corresponding period last year. The increase is mainly due to the effects of the increase in selling prices, which contributed about $18 million and an increase in quantities sold, which contributed $2.5 million to the increase in operating income. The increase was partially offset by the increase in raw material prices, which reduced operating income by approximately $18 million. 4. The Financial Position and Sources of Financing of ICL At March 31, 2011, an increase of $391 million was recorded in the net interest-bearing financial liabilities of ICL compared with the balance at the end of 2010, bringing the total to approximately $1,049 million (see analysis in par. 5 below). ICL's sources of financing are short- and long-term loans, mostly from international banks, debentures issued to the public and to institutional investors in Israel and the USA, non-listed shortterm commercial paper issued from time to time, and customer securitization, in which some of the companies in the Group sell customer receivables in return for a credit facility. The total amount of the securitization framework and credit facility amounts to $350 million. At March 31, 2011, ICL used $100 million of the securitization framework. On March 14, 2011, ICL entered into an agreement with 17 banks in Europe, the United States and Israel, for a revolving credit facility of $675 million. The credit facility is for five years, and is repayable in full at the end of the period. The basic interest rate of the credit facility for up to $225 million is Libor + 0.8% and additional 0.15%-0.3% for amounts exceeding $225 million. 5. Cash Flow Cash flow generated by operating activities in the reporting period amounted to $142 million, compared with $219.6 million in the corresponding period last year. The decrease in cash flow from operating activities is mainly due to a one-time payment of $165 million for income tax as part of the assessment agreement for , which was partially offset by an increase in profit in the reporting period compared to last year. Cash flow from operating activities and the increase in financial commitments was the main source of net financing of investments of $83 million in property, plant and equipment, financing the consideration of about $262 million for acquisition of the companies, assets and activities of a specialty fertilizer business unit called The Global Professional Business (see section 9.4) and distribution of a dividend of $170 million. 6. Investments In the reporting period, investments in property, plant and equipment amounted to approximately $82.9 million, compared with about $84.7 million in the corresponding period last year. 13

14 7. Human Resources The total number of employees in ICL as at March 31, 2011 is 11,135 compared with 10,544 at March 31, 2010, an increase of 591 employees. The increase in the number of employees is mainly due to additional human resources for completion of investments in new facilities, and expansion of production and due to additional employees and the return to work of employees following the return to pre-crisis work formats, mainly in companies abroad. In addition, plans for recruiting engineers in various disciplines at ICL Fertilizers were reinstated and IDE activities were expanded. 8. Market Risk Exposure and Management Base rates as at March 31, 2011: Currency Exchange rate NIS/USD EUR/USD GBP/USD JPY/USD BRL/USD CNY/USD Update of sensitivity to changes in the exchange rates of balances in the statement of financial position at March 31, 2011: Increase (decrease) Increase (decrease) Fair value in fair value in fair value USD/NIS ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) Type of instrument Increase of Increase of Decrease of Decrease of 10% 5% 5% 10% Cash and cash equivalents (3.7) (1.9) Short-term deposits and loans (3.1) (1.6) Trade receivables (7.7) (3.9) Receivables and debit balances (4.3) (2.2) Long-term deposits and loans (19.5) (9.8) Credit from banks and others (7.4) (0.4) (0.7) Trade payables (264.3) (13.2) (26.4) Other payables (144.4) (7.2) (14.4) Bank loans (72.0) (3.6) (7.2) Debentures (397.7) (19.9) (39.8) Options (28.2) (15.0) Forward (23.2) (12.2) Swap (28.9) (15.1) Embedded derivatives (0.9) (1.8) Total (29.3) (16.5) (453.4) Increase (decrease) in fair value Fair value Increase (decrease) in fair value CPI ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) Type of instrument Increase of Increase of Decrease of Decrease of 10% 5% 5% 10% Long-term deposits and loans (4.1) (8.1) Credit from banks and others (0.3) (0.1) (2.6) Other payables (0.1) 0.0 (0.8) Long-term bank loans (7.2) (3.6) (72.0) Fixed-interest debentures (14.9) (7.4) (148.5) CPI/USD swap (2.5) (5.0) Forward (3.0) (5.9) Embedded derivative (1.6) (0.8) (1.7) Total (1.8) (0.7) (133.1)

15 Increase (decrease) in fair value Fair value Increase (decrease) in fair value EUR/USD ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) Type of instrument Increase of Increase of Decrease of Decrease of 10% 5% 5% 10% Cash and cash equivalents (13.3) (6.7) Short-term deposits and loans (5.0) (2.5) Trade receivables (36.9) (18.4) Receivables and debit balances (1.5) (0.8) Long-term deposits and loans (0.3) (0.1) Credit from banks and others (8.2) (0.4) (0.8) Trade payables (178.6) (8.9) (17.9) Other payables (103.7) (5.2) (10.4) Long-term bank loans (249.1) (12.5) (24.9) Options (4.5) (9.0) (17.4) Forward (1.4) (9.5) (18.2) Embedded derivative (0.7) (1.4) Total (17.7) (34.0) Increase (decrease) Increase (decrease) Fair value in fair value in fair value GBP/USD ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) Type of instrument Increase of Increase of Decrease of Decrease of 10% 5% 5% 10% Cash and cash equivalents (0.1) Short-term deposits and loans (2.5) (1.2) Trade receivables (8.3) (4.1) Receivables and debit balances Credit from banks and others (9.6) (0.5) (1.0) Trade payables (11.8) (0.6) (1.2) Other payables (17.4) (0.9) (1.7) Forward (1.7) (0.9) Total (8.7) (4.2) Increase (decrease) Increase (decrease) Fair value in fair value in fair value JPY/USD ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) Type of instrument Increase of Increase of Decrease of Decrease of 10% 5% 5% 10% Cash and cash equivalents (0.6) (0.3) Trade receivables (1.6) (0.8) Receivables and debit balances Long-term deposits and loans Credit from banks and others Trade payables (4.2) (0.2) (0.4) Other payables (0.4) Options (0.4) (1.1) Forward (0.2) (0.4) Total (0.2) (0.2) Increase (decrease) Increase (decrease) Fair value in fair value in fair value BRL/USD ($ millions) ($ millions) ($ millions) ($ millions) ($ millions) Type of instrument Increase of Increase of Decrease of Decrease of 10% 5% 5% 10% Cash and cash equivalents (0.7) (0.3) Trade receivables (0.8) (0.4) Receivables and debit balances Trade payables (7.1) (0.4) (0.7) Other payables (0.5) 0.0 (0.1) Total (0.7) (0.3)